Unit 5: Phillips Curve, Laffer Curve, Disinflation, Deflation and Supply Side

The Phillips Curve

• The Phillips curve that purports to plot the relationship between unemployment and inflation on the theory that as inflation falls unemployment rises and vice versa
•  The trade off between inflation anf unemployment.
• Only occurs in the short run.

The Laffer Curve

• Depicts a theoretical relationship between tax rates and government revenue.
• As tax rates increase from 0, Tax (Government Revenues) increase from 0 to some maximum level and then decline

3 Criticisms

1. Empirical Evidence suggests that the impact of tax rates on incentives to work and save are small.
2. Tax cuts also increase demnad which can fuel inflation
3. Where the economy is located on the curve is difficult to determine 

Disinflation

• A reduction in the inflation rate from year to year and it can be seen in the long run Phillips curve.

Deflation

•  A general decline in the price level 

Hyperinflation

• When an economy experiences an unsual high rate of inflation

Supply Side (Reganomics)

• Change in AS and not AD determines the level of inflation, unemployment rates, and economic growth.
• Supporters of SSE believe is best to lower taxes and decrease regulation
• Lower tax rates provide positive work incentives and thus shift the aggregate supply curve to the right.